I’ve been reading this site daily for 5 years. Has absolutely changed my life in ways I could have never imagined. Thank you all for that.

My actionable question is: Should we take / opinions on this EIDL for our small business?

Loan offer from SBA (terms not final): Up to $79,000 at 3.5% for a term up to 30 years. First year payment deferred but interest accruing.

Our business: Small 2 lawyer law firm, 50/50 ownership, no staff. S-Corp W-2 employees. Opened in mid September 2019. Half court appointed criminal defense, half personal injury. Since it’s a new business I am only making my best educated guess at revenue, but pre-COVID the projection was $240,000 per year. We were right on track for that. Post-COVID seems to be impacting revenues negatively by approximately 40-50%. We will continue to get business, but may be at at a 30-50% reduction [edit] for the remainder of the year. But who really knows. Yearly expenses are approximately $40,000 a year. Zero debt currently and business keeps 3 [edit] months salary and operating expenses as our minimum base line in our operating account. We have $20,000 line of credit at 0% APR for 12 months available on credit cards used solely for business, but personally guaranteed. Zero balance on those.

This is our first business so we are not seasoned in business loans. EDIL loans are complicated to say the least. From what I understand the bare bones is it can only be used for payroll and operating expenses. Forbidden uses are replacing loss revenue, profits/owner dividends or expansion. So basically for us I believe all we could use it for would be payroll and our normal operating expenses.

We did get a PPP loan for $14,000. Thought I would throw it in there as there is something about refinancing the EIDL into the PPP but I don’t quite understand that.

Any thoughts are greatly appreciated. Please ask if you need additional info.

Last edited by Crmck26 on Sat May 16, 2020 11:58 am, edited 1 time in total.

If you think you might need the loan to survive, go for it. You can always pay it back in a month, 6 months, 2 years etc. One way to handle would be to take the cash and put in a savings account and don't use. Have this be your last "layer" of an emergency fund, and at very good interest rate (and the interest is deductible).

Cash is king, and if things get worse before better, you might have trouble accessing enough cash to stay healthy. As we saw with this outbreak, even people with good credit, fast reflexes and a burning desire to access funds had problems doing so. There were even a few brief glitches in accessing short term securities in brokerages.

As attorneys, let me draw your attention to the following excerpts from the EIDL paperwork that givs me pause. I actually find the EIDL to be less complicated than most secured commercial loans, but with a use of funds limitation that is definitely not common.

This first excerpt is pretty straightforward and just provided for reference:

USE OF LOAN PROCEEDS
Borrower will use all the proceeds of this Loan solely as working capital to alleviate economic injury caused by disaster occurring in the month of January 31, 2020

The second is more concerning in how it is worded:

LIMITS ON DISTRIBUTION OF ASSETS
Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company.

What worries me is how this can be interpreted, esp. since money is fungible: Can I legitimately increase someone's pay and give a bonus if in the normal course of business, or is that constrained for 30 years? Company is an S-Corp, and under IRS code certain owner/employees have a designated salary, below the level of profit, and are able to take draws beyond that without additional FICA tax. Revenue varies greatly from month to month, so draws also vary. Can they no longer take draws for the 30 years of the loan? Or, if the loan is for $150,000, and we leave $150,000 in the savings account, is it ok to do anything we want because we can point to the $150,000 that hasn't been used as say "that's the EIDL money - see we didn't use it for gifts/bonuses"?

Also, note the additional administrative requirements of proof of hazard insurance, corporate resolution and annual CPA-generate financial statement which must be mailed to the SBA. Not a big deal, all commercial loans have these features.

Re-read your post and wanted to add one more thing. The PPP loan, while possibly useful and not a "bad" thing, is also a case of the emperor having no clothes. IMO, it was created to make the unemployment numbers look better for political reasons, not to somehow "support" businesses.

Right now an unemployed person can make $840/week give or take a bit depending on the state. When a business gets a PPP, they are supposed to use it to cover payroll for the 8 weeks beginning on the exact date the money goes into your account. So, you are supposed to start paying staff again, whether they come to work or not, and use up that money (25% can be used for rent, utilities, employer paid healthcare - you probably know these details). Anyway, any amount not forgiven turns into a deferred 24 month loan at 1%. You are punished if you didn't use it appropriately, but there is harsh language saying you're supposed to. If you did not maintain the FTE count throughout the 8 weeks, the forgiveness *might* be prorated, resulting in a large cut to the forgiveness. ALSO you must have all FTE from the stated prior period on the payroll on June 30th. Not the same exact people, but the same FTE equivalent count. [Note that this interpretation is not settled, and some think only having all FTE on as of June 30th will give you 100% credit].

I mention all this detail, but then tell you that a number of CPA's CFP's, commercial bankers and other management consultants I have spoken to and also attended webinars from recently suggest that if you are not well capitalized, you are probably better off TAKING THE MONEY, doing your best to do what was intended (spirit and intent), and you might have a small very low interest loan with mostly favorable terms to pay off.

Your description of your financial position paints a picture for me that you are a responsible, sensible entrepreneur, without any behavioral red flags. The only concern is that you don't' have a large cash cushion. I have often advised small business owners to have 3-6 months of emergency funds, not including credit lines etc (those can go away, and have to be repaid with interest after the disaster/impact). Now, I'm inclined to say "6 months is the starting point", maybe you need more unless you have alot of other resources/good prospects. ON top of this, make sure you have a line of credit, an unused credit card or two, and good banking relations. (I also suggest personal disability insurance, and term life if you have defendants even before you build up).

In business school we heard many times that the #1 cause of small businesses failing was undercapitalization. Normally this is because they burn up their cash before they build revenue and figure out their business model, not because the world stops working overnight. I'd hate to see that happen to you guys through no fault of your own.

Thank you so much for taking the time and that analysis. It is incredibly helpful. I have so much to digest that I won't be able to give a fitting reply until I do some more research on the important issues you raised.

The point you make on EIDL restrictions though is probably the most interesting and concerning. One thing I did want to add, and perhaps I'll post it somewhere more tailored to PPP loans, is the new SBA forgiveness guidance on PPP issued yesterday (May 15, 2020). The link (I'm not sure how to use hyperlinks yet on posting here so I apologize if I don't get it right) to it is found at: https://content.sba.gov/sites/default/f ... cation.pdf

Regarding the new SBA PPP guidance, some good, some bad. The bad is this use limitation and certification that you must make for forgiveness: "The dollar amount for which forgiveness is requested" ... "does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed
individual/general partner, capped at $15,385 per individual."

In our situation, since we started our business mid September, 2019 eight weeks of our 2019 compensation is actually less than 75% of our current payroll amount under the PPP loan we were given. Therefore, at least in out situation, we cannot even qualify for forgiveness! Perhaps theoretically we could hire someone to get our payroll up over the 75% threshold, but that is not something we need, would end up costing more and would create a huge headache. I'm sure it messes with a lot of other people in other ways too. This consistent after the fact rule making makes it almost impossible to deal with these Cares Act Loans with any amount of confidence or certainty.

Look closely at the "seasonality" alternative calculation that you can make for forgiveness basis, that might work better for you. But again, even if you don't get much forgiveness, getting the cash at 1% interest and paying back over 24 months (or pmt in full at any time) isn't a bad consequence. I wouldn't however change your business model/business approach by hiring extra staff just to consume the forgiveness - you could just give back some or all of the difference.

I'll post back when I've had time to properly review the new information from the SBA form.

We’re an S Corp, can easily document lost income. Our understanding when applying weeks ago was that these loans would not require personal guarantees from partners. Partners are worried about this becoming personal debt to partners if business dissolves. Am I correct that there’s no personal guarantee, so theoretically if the business can’t repay the loan the partners won’t be personally responsible? If so, seems like a no brainer.

I’m not an expert obviously, but I managed to find a YouTube video that has the EIDL loan document you can review. It goes a bit quick at some points, but if you hit pause you can read everything. One thing to note is the collateral section, where they take as security basically everything your business owns, including deposit accounts. Then it goes on to say you can’t dispose of the collateral, other than inventory, without the prior consent of the SBA. It seems crazy, but technically it sounds like perhaps you couldn’t take money out of your business account without their prior consent - which is impractical and makes no business sense.

“The SBA announced on May 4 that it will be limiting new EIDL loans to agricultural-based businesses only. Additionally, as multiple news outlets have reported, this move is coupled with the SBA’s new imposition of a $150,000 limit on the size of loans, which is significantly less than the original limit of $2 million that is authorized by statute and that the SBA had previously touted to the public.”

I’m sure we will all keep working on this and flush more of it out in the coming weeks.

In our situation, since we started our business mid September, 2019 eight weeks of our 2019 compensation is actually less than 75% of our current payroll amount under the PPP loan we were given. Therefore, at least in out situation, we cannot even qualify for forgiveness!

This is a common misunderstanding. If you only seek forgiveness for 8 weeks of your 2019 compensation, then 100% of that amount is used for payroll. Because 100% is greater than 75%, you satisfied the requirement.

I previously posted two docs from the AICPA about PPP loan forgiveness. I'm pretty sure now that we have the SBA forgiveness, it proves they were not correct in their interpretation. The schedule A calculation on the forgiveness document prorates forgiveness on a week by week basis. Still reviewing and going to work through this in detail, but if you're wanting substantial forgiveness, you need to bring back the same or greater FTE each week of the 8 week period.

I tried attending an SBA webinar today though a Louisiana office that had one that worked with my schedule today. The presentation was lacking, as they had audio issues where no one could hear the presenter and could only see the slides. It was a disaster, everyone ended up leaving, but I stayed as I noticed the audio worked person to person and asked if we could do a Q & A afterwards. They obliged and boy was it worth it - because I was the only one left to ask questions lol.

Anyways, here is the synopsis on the answers I got from a Louisiana regional director of the small business development corporation. PM me for her bio (impressive) or the presentation slides.

On EIDL:No personal guarantee and no collateral on loans up to $200,000.

If you decline the EIDL, there is no ability for you to go back and change your mind, ever.

This is supposed to be used because of an economic disaster, so no owner bonus, but regular owner W-2 salary is ok to use it for (she knew I had a PPP loan as well).

You can place the EIDL in a high interest savings account to earn some money to help pay off the loan/offset the interest rate – but obviously don’t go invest it in the stock market. Again documentation is key on what you spent the money on and the IRS 941.

On 2019 Owner Compensation Cap:
Since our company does not have historical data for the full 52 weeks of 2019, we can do a budget and projection of salary we would pay ourselves for an entire year. Calculate that in a reasonable way and explain that in an attachment to the forgiveness application. Include supporting documentation of expenses and salary that I have used so far as that is hard evidence, along with IRS 941. Use that as our 2019 owner compensation cap. That should be acceptable to the bank and the SBA.

I have a small 7 person S-Corp company, we received PPP almost 100k, pretty sure we will be able to get 80%-85% forgiven, the unforgiven balance I will just pay back at the 1% rate. When all of this 1st started, I applied for EIDL loan and frankly forget I had made application. A few days ago I got notice of EIDL loan approval and the next day the SBA deposited the current max amount ($150,000) into my company account. I am carefully reading the SBA site to make sure I use these funs correctly, for now I am moving these funds to a dedicated account. It says on the SBA documents I signed that funds can be used for "working capital to alleviate economic injury caused by disaster". That is pretty vague to me, and all I can find in the 19 page document I signed.

I am sitting on the final closing docs for our SCorp. We had applied back on March 30, finally got the email last week to open the portal, confirmed amount earlier this week, was approved the next day, and were sent the closing docs to docusign. Capped at 150k for us and we opted for the whole amount.

I’ve seen the “no personal guarantee if under 200k” elsewhere but it’s great to see you confirmed that.

Here’s my issue: we haven’t had a business loan with no personal guarantee before so I’m not quite sure what Im expecting to see. But here’s the last section, which makes me worry that I’m somehow making myself liable for repayment:

“15. Borrower name(s) and signature(s).

By signing or otherwise authenticating below, each individual and each organization becomes jointly and severally obligated as a Borrower under this Agreement.

[our s Corp name]

[signature line]
[my name], owner/officer”

So, they are not asking for a separate personal guarantee and our S Corp is listed as Borrower throughout. But the “individual” in there gave me pause. Maybe I’m overthinking it. If anyone is more familiar with this kind of language and wants to weigh in and point me to a resource that can calm my fears, I’m all ears.

Me: 20 year + business in NYC (C corp) ,, still closed since March 23rd. EIDL opened the portal for me this weekend and offered my 60k. Without going through all the details, I'm up to date with everything.. You don't own a retail biz and make it thru 9/11 and 2008 without knowing what you're doing.. Anyway, I'm expecting NYC will be the last to open, (mid June I'm thinking).
My biggest expense is rent. 4k/month.. I know as soon as I reopen, my business will start to make money again. (ramping up obviously). Summer is retail strongest season. I was thinking of only taking 12k to cover 3 months worth of rent.. I certainly don't need 60k..
My thoughts,, is there pre payment penalties to this ? Can I take the whole thing, park it (super emergency only) , pay it back in 11 months none the worse for wear..
And the personnel liable thing has me concerned.. I'm thinking of buying property in soon, so would this appear on my credit report ?

Obviously this comes with the caveat that no one is 100% sure on all the details and they change frequently. What does seem to be settled though is there is no prepayment penalty. I believe you can also take any amount under the maximum, so maybe that’s more comfortable for you to just take what you want. There is a personal credit check (Hard pull from my understanding), which may have already been done. I’m not sure if it shows up on your personal credit report as a loan though - maybe others can weigh in.

Me: 20 year + business in NYC (C corp) ,, still closed since March 23rd. EIDL opened the portal for me this weekend and offered my 60k. Without going through all the details, I'm up to date with everything.. You don't own a retail biz and make it thru 9/11 and 2008 without knowing what you're doing.. Anyway, I'm expecting NYC will be the last to open, (mid June I'm thinking).
My biggest expense is rent. 4k/month.. I know as soon as I reopen, my business will start to make money again. (ramping up obviously). Summer is retail strongest season. I was thinking of only taking 12k to cover 3 months worth of rent.. I certainly don't need 60k..
My thoughts,, is there pre payment penalties to this ? Can I take the whole thing, park it (super emergency only) , pay it back in 11 months none the worse for wear..
And the personnel liable thing has me concerned.. I'm thinking of buying property in soon, so would this appear on my credit report ?

No personal guarantee if under 200k. No collateral if under 25k. If over 25k SBA will take a general collateral interest in all business assets, accounts, property. That, plus interest accruing, would be the only real downside of parking the entire amount. The upside is that no one really knows where NYC will be in six months or a year, especially if there’s a second wave as some models predict. Payments don’t start for a year but interest does accrue.